Five Tax Cheats Explained

Thinking about stiffing Uncle Sam? Well it's not exactly legal — not at all legal, come to think of it — but one tax expert ran the hypothetical for us.

First off, it is highly illegal and incredibly stupid to cheat on your taxes. This isn't to say that no one does it, but it's important to stress this point strongly off the top. See, the thing about an audit by the Internal Revenue Service is this: it's nothing like being arrested, where you're innocent until proven guilty. It's just the opposite. When the IRS comes a-knocking you're guilty until you can prove yourself innocent.

But with such a tiny fraction of returns audited each year this doesn't mean people aren't out there looking for shady ways to pare down their tax burden. "A lot of tax evaders come to my site," says Kelly Phillips Erb, the highly ethical tax attorney who runs the blog Taxgirl.com. "And I let people talk about it because I find it interesting, and I find their logic interesting."

So do we. And with April 15 less than a week away, we ran a couple tax-dodge tactics by Erb to see what she thought.

Tactic: Not Reporting Your Gambling Winnings

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The law requires that you report every penny you win gambling, even if it seems like charity (say, those wrinkled twenties your drunk buddies reliably fork over chasing low pairs). But while small at-home winnings are easily concealed, if you win more than $600 at the track or $1,200 from a slot machine, the casino will force you to fill out Form W-2G declaring that income to the IRS which means you can't hide your big payday.

This isn't to say you can't lessen the tax hit. "You can actually deduct gambling losses," Erb says. "But you can only take them against your winnings. So if you have a sucky year, you're kind of out of luck."

A tip: If you're going to write down losses (or feel the urge to declare those winnings, especially if you win a lot), make sure you keep a journal, including the date, time and location you were gambling, along with the amount lost and who was with you. It'll come in handy later, if you're ever audited.

Tactic: Inventing a Dependent

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Who's to say how many children really depend on that sweet, sweet taxable income or yours for survival?

"I had a bunch of people send me e-mails this year [through my blog] where they cheated on their 2007 returns by claiming dependents that either weren't real or weren't theirs so they could claim more stimulus because there was an unlimited number of children you could claim for stimulus checks," Erb says.

In fact, fabricating dependents was such an issue, that when the IRS finally forced people to write down the Social Security numbers of the children they were claiming in 1987, they found 7 million fewer dependents that year. Like cheating in any relationship, the key to keeping Uncle Sam in the dark about his imaginary nieces and nephews is keeping the story consistent. "If for ten years you claimed no children, one year you claim ten dependents, and then the next year you don't claim anything, then, yeah, that's going to raise their eyebrows," Erb says. "Either you're hanging out with the octuplet mom for a year and then leaving, or there's something else going on."

Aside from your basic tax fraud, bear in mind that inventing people enters other Patriot Bill-era danger-zones, like swiping Social Security numbers. Probably a real dumb idea to do this one aggressively.

It's equally challenging to invent large donations to these organizations. (Although when you're filling in the "VALUE" box on the Goodwill receipt for those sweater-filled trash bags, remember: any donations under $500, and the IRS generally takes your word for it. Anything over, and you'll need an appraisal.) "For things like cars, they've changed the rules," Erb says, "so you can't just donate a car and say how much you think it's worth anymore."

In the old days, you could just claim the Blue Book value of your car, buy now it's only worth what someone else will pay for it. In other words: say you donate a car that's got a book value of $10,000, but the charity can only sell it for $5,000? You can't claim a $10,000 deduction. To claim a deduction for the car (or boat, or airplane), you'll need to attach Form 1098-C, which is basically a receipt of sale the charity will give you after selling your car. You'll just have to find another way to make up that $5,000. Ten bags of sweaters could do it.

Tactic: You Have a Very Expensive 'Home Office'

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Bring work home? You can deduct rent, utilities, anything for a home office that and this is important is a place exclusively set aside to conduct business. "You can't claim a home office deduction for your kitchen if you also cook on the same counter," Erb says. "Now if you have a small space in your kitchen where you only do your work, then that might qualify."

This means that you can deduct some (but not all) of your rent and mortgage, it is not a license to go hog wild and deduct everything. Like, say, your home phone line. For whatever reason, even if you only have one and use it only to conduct business, the IRS views your home phone line as a personal expense. You can deduct call waiting, call forwarding, voice mail, but not the original line.

A good rule of thumb here is to never write off more in expenses than you make and rarely write off 100 percent of the value of something toward a home office deduction these could be red flags. If you want to make sure that your home office is audit proof, the IRS has a handy (and because it's the IRS, also endless) document, Publication 587, chockfull of so many worksheets and forms you'll feel like you're back in elementary school.

Unless you're a suspected mob boss and they can't nail you any other way, the IRS is usually not that interested in imprisoning people for tax evasion. Like any good shakedown artist, they just want their money. So you'll likely file your taxes, pay a hefty penalty, and move on with a black mark on your permanent record.

Forgetting, poor math skills, being in a coma for six months... these things happen. "But the people who willfully evade taxation, who choose not to file, you can do jail time for that," says Erb.

So if you're very rich or very a prominent human in the world of music, movies, law, business, you might want to get cracking on those taxes. Sure, it's only a crime if you don't get caught, but if you do, the IRS will use you to send a message to all the other non-famous tax cheats and they're going to nail your ass to the wall.

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